While their prices do seem a bit too high, I don't think it is at all realistic to think they have to undercut the kindle in order to sell

I do. I paid $190 (got a Bing rebate while that was going on) for my PRS-300 soon after it was released and thought it was a great deal. But the market has changed-- it will be a cold day in hell when I pay $179 for the 350. The big appeal of the 300 at the time was that it was the single cheapest eInk reader on the market. Now their 5-inch reader is priced a large percentage higher than competing 6-inch readers? If that is the way Sony is going to play the game, they might as well close their ebook division now, because they are dead.